Do settlements for corporate financial malfeasance work?

This week Standard Chartered Bank reached a second settlement with regulators in New York for failing to monitor suspicious financial transactions. It had also promised to tighten up its anti-money laundering processes when it admitted violating US banking rules on transactions with countries under sanction including Sudan and Iran.

Perhaps it didn’t get the message. Total fines will now be US$974 million, but no individuals have been charged. Recently BNP Paribas and Credit Suisse reached multibillion-dollar settlements with the US authorities for financial malfeasance.

The question is why didn’t Standard Chartered’s first settlement, caution and fine lead to better behaviour?

There could be many reasons. Changing banking culture and behaviour is a long-term endeavour made harder if perpetrators are not held to account. Showing there is a downside to bad behaviour (jail) can make reforms easier to implement and underline the urgency.

One hopes Standard Chartered’s lapse was not because fines represented a small price to pay for a lucrative business opportunity.

Because there was a settlement, however, we will never know exactly what happened, how much money is at stake and who was at fault.

Transparency International believes that fully completed investigations are the gold standard of anti-corruption enforcement. Settlements should only happen if they allow for the full publication of evidence and satisfactory punishment of guilty corporations and individuals.

The key here has to be holding people to account and developing “a culture of integrity” supported by top leadership

Time and time again as banks and financial institutions have settled with regulators and accepted multibillion-dollar fines, shareholders are warned that earnings might suffer but few at the top take responsibility.

The US$9 billion settlement with BNP Paribas saw 13 individuals fired. In other cases only a handful of real people have gone to court and many of these are considered small fry or scapegoats. Senior leaders often remain unscathed.

There is a groundswell of opinion that says holding senior managers to account is the only way to truly reform. Overall shareholder activism in the financial sector, for example, is up since the financial crisis. Bob Diamond, head of Barclays, was pushed out as shareholders complained about Barclays’ role in rigging interest rates and regulators punished the bank with big fines.

Despite the fact that the financial sector and banks in particular provide the capital for businesses of all sizes to flourish, it is important that society does not look the other way when they profit from crimes, such as money laundering and market rigging. It sends a very bad message if those responsible for wrongdoing at leading global banks are considered “too big to jail”.

Although the leading global banks have anti-corruption and anti-money laundering policies in place these will remain paper exercises as long as the corporate culture does not actively embrace them, as we have just seen with Standard Chartered. In this case the businesses involved in this second settlement – in Hong Kong and the United Arab Emirates – are small in comparison with the banks’ overall business, but the settlement itself should act as a warning sign to investors that the bank is failing to implement zero-tolerance compliance and this could lead to more criminal investigations in the future.

The solution lies in promoting what we term a greater culture of integrity in banks. It is helped by a policy environment that promotes public information. This includes limited use of settlements. If they are used we recommend a number of steps that need to be taken so that they act as deterrents, including:

  • There should be full publication of evidence and satisfactory punishment of guilty corporations and individuals.
  • In those countries where settlements do not belong to the judiciary tradition or framework, investigations should lead to criminal trials and adequate convictions of corporations and individuals.
  • All settlements should be submitted to judicial review independent from the prosecutor’s office.
  • Prosecution of individuals should always remain possible, with prison terms for severe wrong-doing.
  • Fines on individuals should not be paid by the corporation or third parties, or covered by any corporate indemnity.
  • All relevant information should be provided by the investigative authorities to the fellow authorities of the countries where the offences were committed, so that such countries could bring their own suit.
  • The corporation should commit to compliance programmes with the appointment of an independent expert monitor, clear guidelines to the monitor and publication of a report and of monitoring costs.

If these conditions are not met, settlements are unlikely to stop bad behavior. It took the independent monitor to haul Standard Chartered back to court but still no individual has been prosecuted.

Corruption, money laundering and facilitating illicit financial flows are not victimless crimes. Even if the banks and bankers didn’t commit the criminal offences that generated the funds, if they facilitate those who did, they should also be held accountable.

Editor’s note: The first paragraph of this post was amended on 22 August to specify that the bank admitted wrongdoing.

Carousel image: Flickr, Michael Daddino

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